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Price Elasticity of Demand for Term Life Insurance and Adverse Selection

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  • Mark V. Pauly
  • Kate H. Withers
  • Krupa Subramanian-Viswana
  • Jean Lemaire
  • John C. Hershey
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    Abstract

    This paper provides an empirical estimate of price' and risk' elasticities of demand for term life insurance for those who purchase some insurance. It finds that the elasticity with respect to changes in premiums is generally higher than the elasticity with respect to changes in risk. It also finds that the elasticity, in the range of -0.3 to -0.5, is sufficiently low that adverse selection in term life insurance is unlikely to lead to a death spiral and may not even lead to measured effects of adverse selection on total purchases.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9925.

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    Date of creation: Aug 2003
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    Handle: RePEc:nbr:nberwo:9925

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    1. Rogers, Richard G. & Powell-Griner, Eve, 1991. "Life expectancies of cigarette smokers and nonsmokers in the United States," Social Science & Medicine, Elsevier, Elsevier, vol. 32(10), pages 1151-1159, January.
    2. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 90(4), pages 630-49, November.
    3. Tomas Philipson & John Cawley, 1999. "An Empirical Examination of Information Barriers to Trade in Insurance," American Economic Review, American Economic Association, American Economic Association, vol. 89(4), pages 827-846, September.
    4. Jeffrey R. Brown & Austan Goolsbee, 2000. "Does the Internet Make Markets More Competitive?," NBER Working Papers, National Bureau of Economic Research, Inc 7996, National Bureau of Economic Research, Inc.
    5. Cardon, James H & Hendel, Igal, 2001. "Asymmetric Information in Health Insurance: Evidence from the National Medical Expenditure Survey," RAND Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 32(3), pages 408-27, Autumn.
    6. Hausman, Jerry A & Wise, David A, 1980. "Discontinuous Budget Constraints and Estimation: The Demand for Housing," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 47(1), pages 75-96, January.
    7. Babbel, David F, 1985. " The Price Elasticity of Demand for Whole Life Insurance," Journal of Finance, American Finance Association, American Finance Association, vol. 40(1), pages 225-39, March.
    8. Hausman, Jerry A, 1985. "The Econometrics of Nonlinear Budget Sets," Econometrica, Econometric Society, Econometric Society, vol. 53(6), pages 1255-82, November.
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    Cited by:
    1. Deborah Wilson, 2005. "Acquisition and disclosure of genetic information under alternative policy regimes," The Centre for Market and Public Organisation, Department of Economics, University of Bristol, UK 05/118, Department of Economics, University of Bristol, UK.
    2. Michael Hoy & Julia Witt, 2007. "Welfare Effects of Banning Genetic Information in the Life Insurance Market: The Case of BRCA1/2 Genes," Journal of Risk & Insurance, The American Risk and Insurance Association, The American Risk and Insurance Association, vol. 74(3), pages 523-546.
    3. Alma Cohen & Peter Siegelman, 2010. "Testing for Adverse Selection in Insurance Markets," Journal of Risk & Insurance, The American Risk and Insurance Association, The American Risk and Insurance Association, vol. 77(1), pages 39-84.
    4. Cole, Shawn & Gine, Xavier & Tobacman, Jeremy & Topalova, Petia & Townsend, Robert & Vickery, James, 2010. "Barriers to household risk management : evidence from India," Policy Research Working Paper Series, The World Bank 5504, The World Bank.
    5. Oster, Emily & Shoulson, Ira & Quaid, Kimberly & Dorsey, E. Ray, 2010. "Genetic adverse selection: Evidence from long-term care insurance and Huntington disease," Journal of Public Economics, Elsevier, Elsevier, vol. 94(11-12), pages 1041-1050, December.
    6. Michiel Bijlsma & Machiel van Dijk & Marc Pomp & Cora Zonderland, 2005. "Competition in markets for life insurance," CPB Document, CPB Netherlands Bureau for Economic Policy Analysis 96, CPB Netherlands Bureau for Economic Policy Analysis.
    7. Grönqvist, Erik, 2004. "Does Adverse Selection Matter? Evidence from a Natural Experiment," Working Paper Series in Economics and Finance, Stockholm School of Economics 575, Stockholm School of Economics.
    8. Robert M. Townsend & Shawn Cole & Jeremy Tobacman & Xavier Gine & James Ian Vickery & Petia Topalova, 2012. "Barriers to Household Risk Management," IMF Working Papers, International Monetary Fund 12/195, International Monetary Fund.

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